This week it’s time to put the systematic side of my stock selection process to the test. The next stock I’m going to add to the Stock in Focus portfolio is packaging manufacturer Macfarlane Group.
I’ve chosen this £80m small cap simply because it is the next-highest ranked stock in my stock screen that meets my diversification criteria. The company is actually a new arrival in my screen, as a result of some recent volatility in the firm’s share price.
A cautious AGM statement on 10 May advised investors that subdued market conditions were being offset by recent acquisitions. Despite full-year guidance remaining unchanged, Macfarlane shares fell 9% from 68p to 62p on 10 May. They’ve since started to recover. Assuming the firm does meet expectations this year, I think they could offer good value at current levels.
Stockopedia certainly likes Macfarlane, with a StockRank of 95. The stock also qualifies for six Guru Screens, including the Jim Slater Zulu Principle Screen. This popular screen has delivered annualised growth of 20.9% per year since 2012.
A smart approach to packaging?
Macfarlane is not an old-fashioned cardboard box manufacturer. The firm’s customer base includes major internet retailers, food and consumer goods manufacturers and electronic and defence firms. Macfarlane makes a range of modern packaging and labelling products tailored to the needs of these sectors.
A big part of the business is the group’s distribution service. Using a UK-wide network of distribution centres, Macfarlane can integrate with customers’ systems and ensure packaging is automatically ordered and delivered as needed.
Macfarlane’s net profits have risen from £3m to £5.5m since 2010 and the shares have triple-bagged over the last six years. To maintain this momentum, the firm has been pursuing a strategy of growth by acquisition. This can be risky, but Macfarlane appears to be executing well. The focus is on buying small companies which provide low-risk, incremental growth. This is a strategy that can deliver a surprisingly high mileage if done well.
Good value for a growth stock?
Macfarlane’s ValueRank of 66 is its weakest score, but it’s hardly bad. This high flyer may have the potential to become a super stock.
The shares trade on a trailing P/E of 14.7, with a trailing price to free cash flow…
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